Israel will continue building in all of its Jerusalem municipality and a construction plan that raised questions during Prime Minister Benjamin Netanyahu's current trip to Washington is nothing new, Netanyahu's spokesman said in a statement on Wednesday.

"There is no limitation on the right of property in Jerusalem. Jews and Arabs can buy and sell freely private property and homes in all the city, and that is the reality," the Prime Minister's Office said in a statement.

The statement was issued shortly after U.S. President Barack Obama's administration, at odds with Israel over settlement building in East Jerusalem, said U.S. officials were seeking clarification of Israel's plan for a further expansion of Jewish housing in the Sheikh Jarrah neighborhood.

"Regarding this specific case, the decision for building permits was made several months ago in 2009," the Israeli statement said. "The report that a new decision was made on this at the time of the prime minister's visit to Washington is not true."

Jerusalem councilor Elisha Peleg earlier told Army Radio the plan to build apartments at the Shepherd Hotel in Sheikh Jarrah had been advancing for months and the latest move was just "a technical step."

The Jerusalem municipality has given final approval to a group of settlers to construct 20 apartments in the compound of the Shepherd Hotel, Haaretz learned on Tuesday.

White House spokesman Tommy Vietor said the U.S. continues to believe that Israeli building in East Jerusalem is destructive to the Middle East peace process.

Vietor said the United States is urging both Israel and the Palestinians to refrain from acts that could undermine trust as the Obama administration looks to jump-start the stalled peace process.

Vietor would not say whether U.S. President Barack Obama and Prime Minister Benjamin Netanyahu discussed the specific building project in their meetings at the White House late Tuesday.

"We've made our position on Jerusalem clear on many occasions," a senior administration official said Wednesday.

"We believe this is a final-status issue, and that both sides should refrain from acts that could undermine trust or prejudge the outcome of negotiations. We are seeking clarification on this and other issues from the Israelis," the official added.

An aide to Netanyahu says the prime minister was caught off-guard by Wednesday's announcement of the apartment projects.

Earlier Wednesday, the Jerusalem municipality's representative on the Jerusalem District Planning and Construction Committee, Yair Gabai, said that all committee deliberations over expansion of construction have been frozen following the recent tensions between Israel and the United States over construction in the East Jerusalem neighborhood of Ramat Shlomo.

"Unfortunately, since [U.S. Vice President] Biden's visit all the committee's sessions have been put on hold until further notice," Gabai said.

The Interior Ministry confirmed Gabai's statements, saying that "the prime minister has decided to form a committee of chairmen to improve the coordination between the various government offices over all matters relating to construction and building permits."

Meanwhile, at the United Nations, Secretary-General Ban Ki-moon called the announcement about the Sheikh Jarrah project unacceptable. He had previously condemned the earlier announcement on the 1,600-house plan.

In a briefing to the UN Security Council on his trip to the Middle East last weekend, Ban also said he would set off on Thursday for an Arab summit in Sirte, Libya, to seek Arab backing for proposed indirect Israeli-Palestinian peace talks.

"Is this another 'unfortunate' mistake? Is this another 'misunderstanding?'" asked Cabel, whose party os part of the governing coalition.

"Netanyahu decided to spit into Obama's eye, this time from up close. He and his pyromaniac ministers insist on setting the Middle East ablaze."

The Shepherd Hotel in the Sheikh Jarrah neighborhood was purchased by American Jewish tycoon Irving Moskowitz in 1985 for $1 million.

Moskowitz, an influential supporter of Ateret Cohanim and heightened Israeli settlement in East Jerusalem, plans to tear down the hotel and build housing units for Jewish Israelis in its place.

The local planning council initially approved the plan in July, a move that angered Britain and the United States and prompted them to call on Israel to cancel the plans. The council issued its final approval for the project last Thursday, which now enables the settlers to begin their construction at once.

An existing structure in the area will be town down to make room for the housing units, while the historic Shepherd Hotel will remain intact. A three-story parking structure and an access road will also be constructed on site.

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